St. Louis Bank Trims Its Prime Rate to 10%

Trend-setting Southwest Bank of St. Louis on Wednesday reduced its prime lending rate to 10% from 10.5%, acting fast after signs this week that the Federal Reserve has eased credit to keep the economy from sliding into a recession.

Other banks are expected to follow suit, economists said, viewing Southwest Bank’s move as a logical response to recent behind-the-scenes Fed actions to push interest rates lower.

“Interest rates are heading south,” said Southwest Bank Chairman Andrew Baur, citing the Fed’s guiding hand.

The initial signal that rates were coming down emerged earlier this week with a drop in the federal funds rate, the fee banks charge each other for overnight loans. The rate is highly sensitive to Fed policy, since the loans are to meet Fed cash requirements.

When the rate dropped to 8.5% from 8.75% on Tuesday, helped by Fed injections of cash into the banking system, other key rates were expected to follow. The closely watched rate fell even further Wednesday, slipping to 8.375%.

The Fed easing was a surprise, however, since it took place amid recently mixed economic statistics. But economists agreed that the Fed is hedging its bets to prevent a damaging recession.

The prime is traditionally the interest rate a bank charges its best customers, but is more commonly used now as a peg for consumer rates. The Federal Reserve estimates that half of all home equity loans are tied to the prime.

The St. Louis regional bank’s lower prime takes effect today. It said the move “reflects a general easing of interest rates due to a slowdown of the economy.”

If others follow Southwest, it would be the first reduction in the prime since July, when banks lowered it to 10.5% from 11%.

That move was led by Chase Manhattan Corp., which lowered its prime July 10. Other banks followed suit at the end of the month.

No major banks immediately followed Southwest’s lead Wednesday. Spokesmen for Citibank, Chase Manhattan and Morgan Guaranty, all of New York, and San Francisco-based BankAmerica said they had no immediate announcements on their prime rates.

A small New England bank, First Federal Savings Bank of Boston, announced late in the day that it had lowered its prime rate to 10%, effective immediately.

But easier credit conditions, banks’ lower cost of doing business and a competitive banking environment should prompt others to do so soon, economists said. Nonetheless, some banks awaited more signs from the Fed, which does not announce its policy changes.

“My bottom line is yes, the Fed is in the process of easing or at least sending a signal to the market that it does not want (federal) funds to tighten,” said Joe Plocek, senior vice president at McCarthy, Crisanti & Maffei Inc.

Southwest Bank’s prime rate cut had little immediate impact on the credit market, where commercial banks’ actions are less important than the Fed’s maneuvers.

However, stocks surged, with the Dow industrials closing up 26.23 to 2,623.36 in an enthusiastic response to the lower prime.